Chapter 18 ACC 2

Cost Volume Analysis

Helps businesses understand how changes in sales, costs, and production affect profit

TOTAL fixed costs behavior

Total fixed costs stay the same regardless of production level (within normal range)

UNIT fixed costs behavior

Fixed cost per unit decreases as production increases

TOTAL variable costs behavior

Costs that do not change in total as volume change (straight rising line)

UNIT variable costs behavior

Variable cost per unit stays the same no matter how many units you produce

Mixed costs

Costs that includes both fixed and variable costs

Ex: Sales rep, natural gas, maintenance, electricity, and water

Examples of variable costs

Straight rising line

Direct labor, depreciation on factory equipment, direct materials, packaging, commission

Examples of fixed materials

Flat line

Rent, salaries, insurance, equipment lease, property taxes

Examples of mixed costs

Stairs

Utility bills, phone bill, delivery costs, maintenance, internet

What is the high low method?

Pick highest activity and lowest activity

Find variable cost per unit: Cost difference/activity difference

Find fixed cost: total cost - (variable cost x units)

Contribution Margin

= Sales - Variable Costs

Contribution Margin Per Unit

= Selling Price per Unit − Variable Cost per Unit

Contribution Margin Ratio

= Contribution Margin ÷ Sales
(or)
= (Selling Price − Variable Cost) ÷ Selling Price

Break-even point (units)

Fixed Costs/ Selling Price per unit - variable cost per unit

Break-even point (sales dollars)

Fixed costs/contribution margin ratio

Margin of Safety (MOS)

Margin of Safety (MOS)

• In units: Actual sales units - break even units

• In dollars: actual sales - break-even sales

• Margin of Safety %: Margin of safety/actual sales x 100

Computing Target Income Dollar and Unit Sales 

Target income in units and: Fixed Costs + Target Income/Contribution Margin per Unit

Target income in sales dollars: Fixed Costs + Target Income/Contribution Margin Ratio